The Case For Investing In Palladium For 2013

Tony Daltorio:Anyone who looks at precious metals when investing in 2013 will likely turn to gold and silver, maybe even platinum.

But there is another precious metal that is often overlooked, and should not be: palladium.

Palladium is mainly used in catalytic converters on gasoline-powered vehicles to limit the pollution these vehicles emit, just as its sister metal, platinum, is used in a similar fashion for diesel-powered vehicles.

Palladium recently touched a 16-month high of over $750 an ounce, up more than 25% since November.

And right now it’s offering investors a huge profit opportunity as its price climbs.

Investing in 2013: The Case for Palladium

The main reason behind the recent palladium price move is supply concerns for the foreseeable future.

Both palladium and platinum are under similar supply pressures.

Johnson Matthey, a precious metals refiner, believes palladium supply will lag demand by 915,000 ounces. This is in sharp contrast to 2011’s surplus of 1.26 million ounces and the biggest deficit since 2000. Supply is expected to fall 9.9% this year to 5.84 million ounces, a nine-year low, according to a Johnson Matthey report.

Two countries contributing to these supply constraints are South Africa and Russia.

Both platinum and palladium are found in abundance in South Africa, which is suffering great strife in relations between mining companies and labor unions. Many mining firms have scaled back or even shut down much of their operations in the country.

South Africa produces more than one-third of the world’s palladium, so labor turmoil there will be a significant factor in limiting global supplies of the metal.

The current forecast (with relative labor peace at the moment) is for South African palladium supplies to fall by 6% this year to 2.4 million ounces.

Another key factor is shrinking supplies of palladium coming from Russia.

For decades, the Russian government has been selling palladium from its stockpile. Russia accumulated lots of palladium over the decades when it was just considered a worthless byproduct of mining, before uses such as catalytic converters were discovered.

But now, most experts in the industry believe that stockpile is nearly depleted.

Peter Duncan, researcher at Johnson Matthey, told the Financial Times, “Russian state stockpiles have been dwindling and are now pretty much exhausted.”

Johnson Matthey thinks Russia will sell only 100,000 ounces of the metal this year. The company believes Russia has only about 250,000 ounces left in its stockpile. This is sharply lower than the 1 million ounces a year Moscow was selling for most of the past decade.

That is quite a falloff in a market where total supply last year was 6.5 million ounces.

Newly refined Russian palladium supplies from the likes of Norilsk Nickel (NILSY), the world’s largest producer of palladium, are expected to fall also, thanks to a decrease in the quality of the ore grades being mined.

On the demand side, Johnson Matthey is forecasting automakers will raise the amount of palladium used this year by 7.5% to a record 6.48 million ounces. It should know: The company makes one of every three catalytic converters produced.

The company stated, “Demand for palladium is forecast to benefit from growth in global vehicle production, with the strongest performance in the principally gasoline markets of Japan and the U.S.”

One final factor Johnson Matthey mentions in its forecast is investment demand.

There was liquidation in physical palladium by investors as recently as 2011. But this year looks to be quite different.

Johnson Matthey said, “For the year as a whole, a change in investor sentiment towards palladium ETFs is expected to result in 385,000 [ounces] of net physical investment demand, a swing of 950,000 [ounces] compared with last year.”

It looks as if Johnson Matthey may be spot on. Hedge funds have been piling into the palladium trade.

Commodities fund manager Tiberius Asset Management told the Financial Times, “Palladium is one of our favorite picks among the metals over the long term.” Tiberius said palladium, along with platinum, was one of “only a handful of industrial commodities” looking at long-term market deficit.

How to Invest in Palladium

For individual investors looking to make money from this long-term trend, exchange-traded funds (ETFs) offer an easy way to do so.

The ETFS Physical Palladium Shares (NYSEARCA:PALL), as the name implies, invests in physical palladium bullion.

A second recently launched vehicle is the Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP), which owns both platinum and palladium bullion.

Another option is the aforementioned Norilsk, which will benefit from increased palladium demand. However, one caveat here: The company is the subject of a titanic struggle between two Russian billionaire oligarchs – Vladimir Potanin and Oleg Deripaska. Even the Russia government has been unable to settle the dispute, which has put a drag on the stock performance.

That leaves the ETFs as the safer bet to play the shortage in palladium when investing in 2013.

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